Tax on FD, RD and savings interest

Part of Tax on investments. 6 min read. Free lesson with a short video, quiz and practice.

Interest from bank accounts, FDs, RDs and most post office schemes is taxable. It is added to your income under "other sources" and taxed at your slab rate, in whichever regime you use.

Interest is taxed every year

Interest is taxable in the year it is earned, even if you receive it only at maturity. In a 5-year cumulative FD, each year's interest belongs to that year's income. Many people miss this and get a notice later, because banks report the interest every year.

TDS on deposits

A bank or post office deducts 10% TDS when your interest from it in a year is more than ₹50,000 (₹1,00,000 if you are 60 or above). The limit is per bank, for all your deposits there, including RDs. TDS is not the final tax: if your slab is higher, you pay the rest when filing; if your income is below the taxable limit, you get it back as a refund.

If your total tax for the year will be nil, you can give the bank Form 121 (earlier Form 15G or 15H) so it does not deduct TDS.

Savings account interest

• Old regime: savings account interest up to ₹10,000 a year is deductible. Senior citizens instead get up to ₹50,000 on all bank and post office interest, including FDs.
• New regime: no such deduction. All interest is taxable, but the ₹12 lakh rebate often makes the tax zero anyway.

Which deposits are different

• PPF and Sukanya Samriddhi: interest is fully tax-free.
• Tax-saving 5-year FD: the deposit counts under 80C (old regime), but the interest is still taxable.
• NSC: interest is taxable, though in the old regime each year's interest (except the last) counts as a fresh 80C investment.
• Senior Citizens' Savings Scheme and post office time deposits: interest is taxable.

A worked example

Mr Rao, 66, uses the old regime. He earns ₹1,20,000 of FD interest from one bank. It is above ₹1,00,000, so the bank deducts 10% TDS: ₹12,000. When he files, he claims the senior-citizen deduction of ₹50,000, so only ₹70,000 of the interest is taxed at his slab. The ₹12,000 TDS is subtracted from his final tax.

Real return

Tax lowers what an FD really earns. A 7% FD in the 30% slab earns about 4.8% after tax and cess (7% × 0.688). If inflation is 5%, the real return is slightly negative. Compare deposits on post-tax return, not the headline rate.